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Keeping Up with the E-Giants

(Material Handling Management Via Acquire Media NewsEdge) Since 1995 when Amazon.com shipped its first order and the
precursor to eBay held its first online auction, the world of
e-commerce continues to evolve and change drastically. The early
days of e-commerce were focused on limited items such as books and
computers, and now, the selection of items for sale on the web is
endless.

Today, the leading online product categories are computers and
apparel, footwear and accessories, followed by appliances,
electronics, toys/video games, and music and videos. E-commerce has
grown to $680 billion worldwide and $197 billion in the U.S.

By 2015, e-commerce is expected to be worth $1.4 trillion of
business worldwide and $280 billion in the U.S. By far, the U.S.

has the largest online sales, followed by Japan, China, Germany,
France, United Kingdom, Italy, Canada, Spain and South Korea.

Online sales in the U.S. currently represents approximately 9%
of total retail sales, which is up 5% from five years ago. The
online sales ratio is 10% in the United Kingdom, 3% in Asia
Pacific, and 2% in Latin America.

Many experts project that, globally, online sales will top out
at as much as 20% of total sales. Online penetration by category
varies widely with computers topping the list at 52%, followed by
books at 20%, music and video at 16%, electronics 14%, toys and
video games 13%, sporting goods 11%, jewelry 10%, apparel, footwear
and accessories 9%, and flowers 8%.

Blurring Lines between Retailing and E-tailing
In the past, for the majority of retailers, there was only one
channel. Of course there were major exceptions, such as Sears and
J.C. Penney, that also had a large catalog business. After 1995,
more and more traditional retailers began a direct-to-consumer
business through the web. Now, almost all large retailers also go
to market via the web.

This new direct business was competing with the traditional
business and created unhealthy competition and rivalries. Some
companies even had three channels of distribution: traditional
retail, catalog and Internet; this is referred to as multi-channel
distribution. Through time, and with the adoption rates of
e-commerce, many of these multi-channel distributors blended their
catalog business with their Internet business and dubbed it
direct-to-consumer.

As technology advances, it will be harder and harder to tell the
difference between a retail sale and an e-commerce sale.

It is estimated today that digital information influences
approximately 50% of retail sales. Whether it is a smart phone,
website, kiosk, direct mail and catalog, call center, social media,
mobile device, gaming console, television, or a networked
appliance, consumers are using digital information to influence
their retail purchases.

The number of retail sales influenced by these devices is
expected to continue increasing in the future. Many refer to this
blend of technology and retail as omnichannel.

There are many examples of omnichannel. Consider the example of
shopping for shoes at a department store and finding the store is
out of stock on the required shoe size. The sales associate looks
at inventory online and determines that a neighboring store has the
shoes in stock. He then offers the customer the option to pick them
up in-store or have them shipped directly to the customer’s
home overnight. This example is real and happens every day.

Another example is shopping for a flat screen television at the
local electronics store while searching online with a smart phone
for a better price at a club store and using that lower price to
garner the price matching discount at the electronics store.

Customers are out in front of the omnichannel trend, and as the
use of smart phones and iPads and tablets increase, this will
continue. Retailers that do not embrace this trend may find
themselves lagging behind the leaders and losing critical market
share.

How e-Commerce
Leads the Way
Clearly Amazon is the market leader when it comes to e-commerce.

Nearly all e-commerce companies follow them closely and try to
emulate their practices. Amazon has 18% market share in e-commerce
in the U.S., and that is estimated to increase to 33% by 2016.

Amazon’s worldwide sales are greater than $34 billion, and in
2010, they grew by 39.5%.

With the expectation that Amazon will outpace e-commerce growth
by 2 to 1, competitors who are hoping to keep pace with them must
do the same. Amazon sets the tempo of the online industry with low
costs, wide selection, convenience and customer service.

Low Costs
Amazon’s low-cost lead is attributed to several areas.

First of all, Amazon has a sales tax advantage over many of its
competitors, which automatically puts them at a lower cost
position. Likewise, the company’s large scale provides
advantages in operating costs, while their large number of
facilities and inventory strategies allow them to position
inventory closer to customers, helping minimize outbound shipping
costs.

The leaders certainly have an advantage in scale, which may not
be the case for many competitors. However, there are two key areas
to focus on to help reduce costs and improve margins.

The first is fulfillment center efficiencies, which is commonly
tracked as fulfillment cost per unit. This includes all costs
associated with processing within the four walls of the
distribution center. There are many strategies employed to reduce
cost per unit such as exploiting the order profile to look for
opportunities to efficiently process orders. One such example is
“single line” orders. Typically there are a high
percentage of orders which only have a single line and unit per
order. These orders can be handled extremely efficiently with batch
picking and automated packaging.

The second opportunity to reduce cost is on the shipping side.

Savings can be gained by performing a competitive bid with parcel
carriers to obtain the best possible discounts and service
levels.

Wide Selection
Since its conception, Amazon has felt that depth and breadth of
products was a key competitive advantage. Today, they have taken
that approach to a large number of categories, and through the
Amazon Marketplace, they are able to provide a massive selection of
products to online consumers.

Many other e-tailers have made a wide selection of products a
key pursuit of theirs. They have also adapted their fulfillment
centers to handle a wide range of products and have the flexibility
to expand new products when required.

Internet fulfillment centers vary from traditional distribution
centers in which the majority of product is stored in case
locations and there is limited pallet storage.

A successful strategy that facilitates wide product selection is
having very large picking areas with picking directly out of case
storage. The strategy also includes having faster moving items in
multiple locations throughout the picking area and having only a
single case of slow moving items in the picking area.

Advances in warehouse management system functionality and order
management make it possible to optimize pick paths and minimize
travel while maintaining a large pick area with a wide assortment
of products.

Convenience
Amazon has developed many innovations in regard to online
convenience, most notably with their one-click checkout and
advanced search and recommendation functionality. Amazon’s
scale also provides an advantage in shipping speed. A true measure
of convenience is the average delivery time from click to delivery.

Amazon and some of the other leaders average three days, which
includes order processing time, credit check, fraud check, and
other order processing requirements, plus shipping transit
time.

The leaders are able to provide superior delivery speed due to
having a multi-facility distribution strategy and optimally
locating their facilities near customer demand to minimize
in-transit time. With best-in-class order processing times of one
day, the leaders are averaging three days of in-transit shipping
time to reach their customers.

A single fulfillment center strategy will not be able to meet
those numbers but a strategy with two distribution centers can
approach those numbers. To compete with the leaders on delivery
speed, a distribution network optimization can help locate
fulfillment centers near demand to help reduce transit time and
increase customer convenience.

Customer Service
Amazon’s Zappos has always made customer service their top
priority, and it has been a hallmark of the company. Their first of
ten core values is to “deliver WOW through service.” On
the Zappos website WOW is defined by the following: free shipping,
free returns, free 365 day return policy, 24/7 customer service and
happiness.

It is clear that customer service is a key priority among online
shoppers and a real differentiator for the leaders. A key component
of customer service is order accuracy, and it is imperative that
fulfillment centers pay close attention to this. Whether accuracy
is enhanced through automation, warehouse management systems, or
outbound quality control, it is imperative that the followers focus
on this area and do not lose ground to the leaders.

Keeping Up with Amazon
Although Internet fulfillment has existed for less than 20
years, there has been a significant evolution in how products are
purchased online and the expectations of online shopping and
fulfillment. Amazon is the leader in many areas and is poised to
continue to capture market share. If others wish to gain market
share, they must continue to focus on reducing costs, providing a
broad assortment of products, providing convenience, and finally
providing high levels of customer service.

Jim Tompkins is CEO of Tompkins International
(www.tompkinsinc.com), a supply chain consulting firm, and Dan
Avila is a partner with the firm. Tompkins is also a member of
MH&L’s Editorial Advisory Board.